For the $8.5 billion American Beacon Large Cap Value Fund, hiring a stable of like-minded investment managers to assemble a portfolio of large- cap value stocks is testimony to the virtues of leaving the heavy lifting to others.  

Instead of hiring one sub-advisor or doing the job in-house, the multi-manager fund divides responsibility for its assets among four investment sub-advisors, all of whom share American Beacon Advisors' growth-at-a-discount-philosophy. Total returns for the 21-year-old offering, one of the first in the now crowded multi-manager field, land it in the top 11%  of Morningstar's large-cap value peers over the last three years and in the top 7% over the last five years. Low standard deviation, a stubborn tenacity in down markets, a cheap expense ratio and a tax-efficient, low-turnover strategy round out its appeal to Morningstar analyst  Michael Breen, who calls it "one of the best large-value funds."

The multi-manager approach is an outgrowth of American Beacon Advisor's roots in pension fund management.  William Quinn, who had been with American Airlines since 1974 and assumed the responsibility of overseeing the company's pension funds in 1980, launched the firm in 1986 to manage the pension plans for AMR Corporation, the parent company of American Airlines.  American Beacon Advisors currently manages approximately $64 billion in pension assets and short-term cash assets for American Airlines and outside clients, with about half of that in the American Beacon Funds.  

The process of finding successful, experienced practitioners with similar investment philosophies winnows down the vast universe of candidate firms to a manageable number.  Before they are hired to manage the mutual funds, the advisor candidates must show their mettle by running a paper portfolio for up to two years, and managing a portion of the assets in the American Airlines pension plan, which is also run by the firm.

A team headed by Adriana Posada is responsible for selecting and monitoring how the fund's sub-advisors are handling their piece of the pie and whether they are sticking to their classic value roots. "There are a lot of deep value investors out there, but that is not what this fund is about," says the 53-year-old manager.  "We like stocks with a more traditional value tilt. The firms must have a second generation of younger managers on board to fill in for those nearing retirement, and a proven track record of at least five to ten years. They have to have the ability to replicate over long periods of time what they have done in the past."

The question now is whether this fund, as well as other large- cap value offerings, can keep its momentum going. During the first three- quarters of this 2007, large- cap growth stocks surged as investors gravitated toward the combination of cheap valuations and the potential for rapidly growing companies to sustain earnings in a weak economy. As the end of the year approaches, growth funds are running well ahead of their value counterparts.
Posada says she is not concerned with the shift in market leadership, since volatility provides an opportunity to pick up good stocks that are experiencing temporary downturns. And because value stocks have outpaced growth stocks for most of the last seven years, valuations between the two are still narrow and the lines between the more moderate versions of the respective styles remain fluid. "Value and growth are no longer mutually, exclusive," she maintains.

Many "classic" value funds now own securities that were once considered growth stocks, and this one is no exception. The sub-advisors have picked up names, including some in the pharmaceutical and technology sectors, that now qualify as value stocks by their definitions. On the other hand, they have pared back on industrials, a more traditional value sector. "Prices have been catching up with once-cheap valuations. Many industrials have become too expensive and look more like growth stocks in that respect. There isn't a lot of value left," she observes.

While all four of the fund's sub-advisors try to buy great businesses that are trading at significant discounts because of temporary problems or market misconceptions, they approach the process from different perspectives. Some start with a sum-of-the-parts analysis by comparing the value of a business and its assets with its stock price. Others place more emphasis on forward earnings, dividend yield, or price to cash flow measures.
Barrow, Hanley, Mewhinney & Strauss focuses its initial screens on stocks with below average price-to-book and price-to-earnings ratios
and above-average dividend yields. Brandywine Global Investment Management, a subsidiary of Legg Mason, takes a deeper value approach with stocks that are substantially undervalued based on traditional metrics such as price-to-earnings or price-to-cash flow. Companies must also possess catalysts necessary to return to normal levels of profitability and valuation. Metropolitan West Capital Management screens for high-quality companies that may be undervalued because of temporary problems. And Hotchkis and Wiley Capital Management's investment parameters zero in on a company's tangible assets, sustainability of cash flow and potential for improving business performance.

Barrow Hanley, Metropolitan West, and Brandywine each manage about 30% of the portfolio. Hotchkis and Wiley only runs about 9% because the firm has been closed to new investors for the past two years and no longer takes on new inflows. Posada gives each of them their proportionate share of the assets and, then aggregates their picks into one portfolio. If several managers select the same stock, then she views this as a positive sign and adds more space in the fund for it than she otherwise would.

The companies the sub-advisors select for this fund generally have market capitalizations similar to the market capitalization of the companies in the Russell 1000 Index. Investors will find no big bets or surprises here. The top ten holdings account for just 20%. At 26% of assets, financials represent the largest sector, with industrials, consumer discretionary, and health care weighing in at 12.8%, 10.6% and 10.5%, respectively. The 160 holdings represent a broad mix of well-known names that populate a portfolio with a weighted average market cap of $80 billion, a dividend yield of 2.1%, and a five-year earnings growth rate of 18.1%.

Lately, the fund's sub-advisors have been adding to positions in financial stocks, which have been trounced this year as the credit crunch and sub-prime lending woes continue to haunt the market. "There was a lot of fear out there, particularly in the last quarter," says Posada. "But a number of great banks with solid businesses are being punished with the rest of the group."

  cites Bank of America, the fund's third-largest holding and its largest financial position, as one of them. "At the end of August, the stock was selling at just ten times this year's earnings and had a dividend yield of over 5%. It has the financial strength to survive the turmoil, and will benefit as weaker competitors go out of business." She believes earnings growth in the mid- to high- single digits over the next three to five years, coupled with a high dividend, should produce solid returns. Other holdings in the financial sector include J.P. Morgan Chase, Citigroup and AIG.

But some financials the fund owns have suffered more severely. The fund's sub-advisors purchased Bear Stearns because it is a diversified financial company with a conservatively maintained balance sheet. It was trading at a low price- to- book value due to weak mortgage markets, relative lack of international exposure and cyclical weakness in the industry, problems that they considered temporary. The stock was hurt during July and August as the mortgage meltdown occurred and the headlines highlighted problems with hedge funds managed by the investment management arm of the firm.

Posada says there is reason for optimism. "Already, spreads and volumes have begun to rebound in the mortgage markets and there are reasons to believe in the long- term growth for residential markets. Bear Stearns has been investing excess profits in their international platform, another avenue for growth. And while the industry is slowing currently, historically these conditions have been short-lived. The company is the cheapest in its industry and thus is well- positioned to reward investors when favorable conditions reemerge."

She continues to favor Conoco Phillips, a top holding that the fund has owned for several years. "The stock is reasonably priced and trades at 9 times next year's earnings, compared with 10 to 12 times earnings for some of its competitors. The company has more debt than some of its peers, but it's making good use of it with strategic acquisitions. It's got a great product and geographic mix. And with oil prices so high it is in a good position to use its tremendous cash flow to pay down loans and buy back its stock."

She also gives a nod to AT&T, a long-time holding that she says has yet to reap the full benefit of its merger with Cingular. "There are still a lot of savings to be realized here. Margins are lower than the industry average, but once the integration is completed things should improve."